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Statutory Derivative Proceedings in Scotland: A Procedural Impasse?

Document Cited authorities 11 Cited in Related
Vincent
DOI10.3366/E1364980909000675
Published date01 June 2009
Pages511-516
AuthorDavid Cabrelli
Date01 June 2009

Where a shareholder seeks a remedy on behalf of a company on the basis that a director has engaged in an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust, sections 265 to 269 of the Companies Act 2006 stipulate that he or she must first apply to the court for leave to raise proceedings against that director or some other third party. Wishart, Petitioner1

[2009] CSOH 20, 2009 SLT 376.

is the first application for leave considered by the Scottish courts where a member of a company has sought permission to be granted the right to raise such derivative proceedings against a director and a third party. In resolving to grant leave to the petitioner, Lord Glennie made some interesting observations about the minutiae of the application for leave procedure. In addition, the decision raises a number of central points which touch on the substantive law PRE-2007 LAW AND PROCEDURE

Sections 265 to 269 of the Companies Act 2006 came into force on 1 October 2007.2

Companies Act 2006 (Commencement No 3, Consequential Amendments, Transitional Provisions and Savings) Order 2007, SI 2007/2194 art 2(1)(e).

Prior to that date, whilst the law of Scotland was not particularly well-developed, it was clear that a member had the right to raise an action at common law against a director or third party in order to obtain a remedy on behalf of the company.3

Orr v Glasgow etc Railway Co (1860) 3 Macq 799; Lee v Crawford (1890) 17 R 1094; Hannay v Muir (1898) 1 F 306; Anderson v Hogg 2000 SLT 634; Wilson & Docherty v Inverness Retail & Business Park Ltd & Shaw 2003 SLT 301; A A Paterson “The derivative action in Scotland” 1982 SLT (News) 205; D Cabrelli, “Derivative actions: part of the minority shareholder's ‘forensic arsenal’ in Scotland?” 2003 SLT (News) 73; R Goddard, “Shareholder remedies in Scotland: Anderson v Hogg” (2003) 7 EdinLR 93.

 In terms of Barrett v Duckett4

[1995] BCC 362 at 367 per Peter Gibson LJ.

 and Rule 19.9(3) of the Civil Procedure Rules, where a plaintiff raised a derivative action in the English courts, there was an obligation to make a preliminary application for leave to continue within a relatively short period of instituting such proceedings. The purpose of this process was to weed out baseless or vexatious claims. An attempt to import the English “permission to continue” procedure was rejected by Lord Eassie in Wilson v Inverness Retail and Business Park Ltd.5

2003 SLT 301.

 His Lordship took the view that a preliminary challenge to the claim could be made by the director or company on the basis of a preliminary plea to the competency of the action or on the basis of a lack of title to sue.6

Wilson v Inverness Retail and Business Park Ltd 2003 SLT 301 at para 22. One might conjecture that Lord Eassie's approach is attributable to the fact that the issues of competency or title to sue are matters of substantive, rather than procedural, law in Scotland (unlike in England). See Law Commission, Report on Shareholder Remedies (Law Com No 246, 1997) 118 at para 3; Explanatory Notes to the Companies Act 2006 para 488.

In the event, section 266 of the Companies Act 2006 introduced a particular form of requirement for leave into Scots law along the lines of the English model which had been rejected by Lord Eassie in Wilson. Thus, an application for leave to raise derivative proceedings must first be made and considered by the court in terms of sections 266 and 268 of the Act. On the face of it, therefore, the Act suggests the existence of two separate proceedings, the first being the application for leave proceedings and the second being the substantive derivative proceedings. This can be contrasted with English law where the application for leave is an integral, albeit incidental and preliminary, part of the substantive derivative claim itself.7

Companies Act 2006 s 261(1).

 THE APPLICATION FOR LEAVE PROCEEDINGS

Section 266 envisages a two-stage application for leave process. First, in terms of section 266(2), the application for leave must be lodged with the court, specifying the cause of action and summarising the facts on which the derivative proceedings are to be based. If the court is not satisfied ex parte (on the basis of evidence produced to substantiate the...

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